Perfect storm puts a twist in success stories

Amonth into the new year and resource stocks continue to be weighed down by falling commodity prices caused by concerns over China’s rampant inflation and fears that the global economic recovery may stall.

The S&P/ASX Materials Index is down 1.3 per cent and the S&P/ASX Small Ordinaries Resources Index has lost 3.3 per cent.

Keeping the sector in the red is the prospect that China will raise interest rates to halt the risk of elevated inflation. In the US, stubbornly high unemployment is creating unease among investors about the strength of its recovery.

Meanwhile, in Europe, sovereign debt is stoking fears the currency union could be dismantled.

Usually one of these factors would be enough to curb the immediate outlook for commodities, but simultaneously they could hamper investor appetite for resources stocks.

Company Profile

This year could be a difficult year for Equinox. Its shares are already down 1.7 per cent following the release of a disappointing December production report.

Over the past five years, shares in the company have trebled as its status moved from copper explorer to producer. But with a production schedule in place and copper prices at record levels, some analysts have decided that the miner’s rally may have run out of puff. Brokers Credit Suisse, UBS and Citi no longer recommend the stock, after backing it previously.

Back in 2009, UBS analyst Jo Battershill was recommending investors buy Equinox at $2.88, and he continued to back the stock until it reached $5.79 in October.

Since then he has suggested investors sell their shares and, judging by the company’s early performance this year, he could be right.

Conquest Mining has had an even tougher time of it this year. Its shares are down 13.8 per cent.

The miner produced 8041 ounces of gold at a cash cost of $1211 an ounce in the December quarter from its Pajingo operations, but its profit margins have shrunk as the gold price has come under pressure.

Since reaching a record high $US1431.25 in December, gold has fallen 6 per cent to $US1339.75 an ounce, putting pressure on mid-tier producers like Conquest.

The falling gold price is putting pressure on Conquest to speed up the development of its Mount Carlton project, which has a higher profit margin with estimated cash costs of $US565 an ounce.

Carnarvon Petroleum should be benefiting from an upbeat production report and climbing oil prices.

Instead, its shares are languishing, down 14.7 per cent this year, following last year’s 27.8 per cent fall.

But unlike Equinox, analysts unanimously support Carnarvon, with six of them rating the company a “buy".

Carnarvon is now drilling in an area with an estimated 90 million barrels of oil.

In the December quarter it produced 243,366 barrels of oil, in line with the previous period.